Total Revenue in Economics: Definition & Formula

Total Revenue in Economics: Definition & Formula
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  • 0:01 What Is Total Revenue…
  • 1:27 Using Total Revenue in…
  • 4:42 Formula for Total Revenue
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Lesson Transcript
Instructor: Aaron Hill

Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.

Learn what total revenue is and why it is important to understand. Discover the formula to calculate total revenue and find out how you can maximize your total revenue in business.

What Is Total Revenue in Economics?

In business and economics, one of the most important measures for evaluating your success and progress is looking at the trends in your total revenue. You need to know this important measure so that you can eventually calculate your total profit for a business.

Total revenue in economics refers to the total receipts from sales of a given quantity of goods or services. It is the total income of a business and is calculated by multiplying the quantity of goods sold by the price of the goods. For example, if Company A produces 100 widgets and sells them for $50 each, the total revenue would be 100 * $50 = $5,000. In economics, total revenue is often represented in a table or as a curve on a graph.

It is important to note that the concept of revenue in economics usually involves two other key terms. The first term is average revenue (AR), which refers to the revenue per unit of output sold. It is obtained by dividing the total revenue by the number of units sold.

The second term is marginal revenue (MR), which is the additional revenue generated from the sale of an additional unit of output. In other words, it's the change in total revenue from the sale of one more unit of a good. For example, if Company A sold one more widget and their revenue increased from $5,000 to $5,050, the marginal revenue would be equal to $50.

Using Total Revenue in Business

Marginal revenue is important because it helps us understand the relationship between the number of units sold and the total revenue. As you can see on this chart, how much you charge per item can affect how much you sell, which, in turn affects your total revenue. In other words, just charging a lot for each item isn't the best strategy for increasing revenue.

Total and Marginal Revenue Table
revenue graph

You will notice that total revenue is maximized when this company prices its product at $60 and sells 9 units. In order to sell the tenth unit, however, the company would have to lower its price per unit to $50, and it would actually generate $40 less in total revenue. If the business sold its product at $65, it could sell 8 units for a total revenue of $520; this is a higher average price but lower overall total revenue than if it sold 9 units.

Total revenue can change based on the price elasticity of a product. Price elasticity is a measure used in economics to show how consumers respond, or demand a product, based on changes in price. Different products or goods have different elasticities. People are more price sensitive (elastic) or less price sensitive (inelastic) toward different products. For example, inelastic goods include items like toilet paper, water, milk or baby formula. This means that if the price goes up, you will probably still pay for these goods because you need them for daily life.

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